Thursday, 15 September 2016
Thursday, 5 June 2014
Should Environmental Activists Be Considered Pirates?
I consider this question in the context of the Ninth Circuit's decision last year in Institute of Cetacean Research v Sea Shepherd Conservation Society.
The article was just published in the Lloyd's Maritime and Commercial Law Quarterly and can be accessed here.
The article was just published in the Lloyd's Maritime and Commercial Law Quarterly and can be accessed here.
img credit: seashepherd.org
Monday, 25 March 2013
Finality Confirmed, Constitutionality Upheld: Major Victory for International Arbitration Community in Australia
This is my latest article co-authored with Matthew Lee, published on the Kluwer Arbitration Blog.
Here's a sneak peak:
Last Wednesday, the international arbitration community in Australia won a significant victory. Indeed, in TCL Air Conditioner (Zhongshan) Co Ltd v The Judges of the Federal Court of Australia [2013] HCA 5 (13 March 2013), S178/2012, the Australian High Court (“Court”) dismissed a challenge to the constitutionality of the International Arbitration Act 1974 (Cth) (“the Act”), and thus confirmed Australia’s appeal as a hub of international arbitration in the Asia-Pacific. The decision has important implications not only because it confirms the finality of international arbitral awards, but also because it clarifies the demarcation between judicial power and arbitral authority under Australian law. As we argue in this post, this is a welcome move, particularly in light of the Australian Government’s resolution to no longer include investor-state dispute settlement provisions in BITs and FTAs, a decision which sent shockwaves throughout the international arbitration community and placed a question mark on Australia’s commitment to its growing international arbitration industry.
Read the entire article on the Kluwer Arbitration Blog here:
http://kluwerarbitrationblog.com/blog/2013/03/19/finality-confirmed-constitutionality-upheld-major-victory-for-international-arbitration-community-in-australia/
Monday, 17 September 2012
Why lawyers make better Presidents
Full disclosure: I'm a lawyer. Further disclosure: I represent corporations. So this is a tough one. But after hearing Clint Eastwood's speech at the 2012 Republican Convention in Tampa, I couldn't help but to write this to defend my trade.
" See, I never thought it was a good idea for attorneys to [be] the president"I think it is maybe time - what do you think - for maybe a businessman. How about that?" said Clint Eastwood that night.
In saying that, Clint made my day, for it justified me putting to paper something which I had already been planning to write for quite some time. That is, why do lawyers make better Presidents than businessmen ever could?
The facts first. Twenty-five out of forty-four US Presidents came from a background in law. Thomas Jefferson, one of the founding fathers of the United States, as well as the main author of the Declaration of Independence, was a lawyer for about five years before entering politics. Franklin Roosevelt, also a lawyer, was crucial in helping the US navigate through the Great Depression and World War II. Most recently, President Barack Obama (yes, also a lawyer) ended the War in Iraq, won a Nobel Peace Prize, and redefined America's role in the world.
Lawyers arguably have a number of advantages over businessmen when it comes to politics. First, lawyers are creatures of advocacy. A lawyer's professional life revolves around advocating specific positions on behalf of its clients, similar to a politician's advocacy of a constituent's interests. After all, law is an extension of the democratic process. Lawyers are trained in navigating through legislation and policy, and this gives the legal profession a head start in understanding how society works, which in turn helps them serve it better.
Lawyers are also fundamentally bound by ethical duties to the client, the profession and the public at large. No such equivalent exists in the world of business. The legal profession is a principled one, firmly rooted in the principles of justice, freedom and ethics.
Granted there may be crooks, like in any trade. "Kill all the lawyers" wrote Shakespeare inHenry VI. Written in praise of lawyers as a profession that respects the rule of law, the line has been misinterpreted ever since to convey derogatory depictions of lawyers.
Lawyers and businessmen have different objectives. Lawyers seek to maximize a client's freedom; businessmen, shareholder wealth. (To be sure, some lawyers help businessmen do the latter and there's nothing wrong with that as long as everyone plays by the rules.) But arguably, the desire to get the right answer permitted by law is a better qualification for government than the greed to get-it-all at any cost. As the English playwright W. Somerset Maugham once put it, "any society that values wealth above freedom will lose its freedom, and will ultimately lose its wealth as well."
Businessmen are mostly concerned with maximizing shareholder value. As Milton Friedman, a leading economist at the University of Chicago, once put it, "the only social responsibility of business is to increase profits." Granted, the corporate social responsibility movement is trying to change that and instill a greater sense of responsibility in the commercial world. Businesses have the ability to do good. And some even do great. They create jobs and invest in new technologies that make our lives easier.
But a country cannot be run like a corporation. Business cannot become synonymous for society. Society's core is not comprised of shareholders, but people. As Elizabeth Warren passionately argued at the Democratic Convention in Charlotte, " people have hearts. They have kids. They get jobs. They get sick. They cry, they dance. They live, they love, and they die, and that matters."
Lawyers, as agents of the democratic will, are aptly suited to govern the country's political machinery. In 1774, John Adams, the second President of the United States, famously proclaimed that ours is "a government of laws, and not men." Men barter for the lowest price. Lawyers argue for the greatest ideals.
At the end of the day, though, this election will likely be decided on business principles: not necessarily who has the best background, but who has the biggest bankroll.
Friday, 14 September 2012
When Clean Energy Is Not Enough
The
world's appetite for clean energy has never been so great. Global
warming, with its shadow of impending doom, is largely to blame for this
obsession with alternative energy. And rightly so. But the world should not miss the forest for
the trees in its glorious pursuit of (green) happiness. Though clean
energy is a commendable solution to meet our growing demand for energy, other
environmental issues should not be sacrificed in the process.
And that is essentially what a federal court in Brazil avoided last week when it suspended the construction of potentially the world's third largest hydroelectric dam (the "Bel Monte dam") for failure to consult with indigenous communities in the Amazon region. The federal court's decision stated that the Brazilian Congress acted illegally in giving the green light for the project without consulting with indigenous tribes living in the area. As this renders the project's environmental license invalid, the consortium conducting the project is liable to a daily fine of 500,000 Brazilian reais (US$247,500) if construction continues.
Brazil has one of the world's most diversified energy matrices. According to Brazilian government data, 45.3% of its energy is generated from renewable sources, such as water, biomass, ethanol, wind and solar sources. Hydroelectric power plants, such as the would-be Bel Monte dam, generate over 75% of the electricity used in Brazil. As the Amazon region depends heavily on fossil fuels for energy, the Brazilian government is adamant on pressing ahead with the Bel Monte project to make the region more self-sufficient.
Brazil is also home to almost half a million indigenous people, whose ancestors pre-date Brazil's European discovery by the Portuguese in 1500. If construction of the dam goes ahead, approximately 500 square kilometers of land along the Xingu River in the Amazon would be flooded. According to official government estimates, this would displace some 16,000 people, with environmentalists putting the number much higher at 40,000. The project may also adversely affect large areas of the rainforest and fish stocks upon which indigenous people depend on.
In his ruling, the judge noted the consortium's failure to follow an international law known as the International Labor Organization Convention No. 169 ("the ILO Convention"), ratified by Brazil in 2002, which demands consultations of tribal and indigenous people, before work can commence in areas that may affect them. The Convention seeks to protect tribal peoples' right to, amongst other things, own the land they live on and to make decisions about projects that may ultimately have an adverse impact on their lives.
The court's decision comes as a surprise given that Brazil's Solicitor-General recently signed a directive that opens up all indigenous lands to mineral, dams, roads, military bases and other developments of "national interest' without the need to consult with or address concerns of indigenous people. Not only is the directive in clear violation of the ILO Convention, but it has also been described as "unconstitutional" by Brazil's Public Prosecutor's Office.
Ultimately, the court's decision may do little to prevent the construction of the Bel Monte dam. The consortium may appeal and win. Alternatively, the Brazilian Congress may expedite consultations with indigenous tribes to satisfy procedural requirements. The decision highlights inherent tensions in environmental policies that seek to promote clean energy to sustain economic growth on one hand, and sustainable development on the other. Decision-makers are caught in the middle by having to engage in a balancing act that may not always produce the best results, nor protect the most valuable interests.
"The fundamental question that Brazilians must re-examine is not merely how to balance different stakeholder interests, but how do we deal with our growing energy consumption" says Kamila Guimaraes De Moraes, a Brazilian environmental lawyer and Capes Foundation researcher at The Federal University of Santa Catarina in Brazil.
The development of clean forms of energy is a worthwhile pursuit as the world struggles to tame global warming. But it may not have the impact we so eagerly anticipate if it is not accompanied by a more fundamental -- cultural -- change. That is, recalibrating our hunger for energy writ-large. Any other solution is likely to merely treat the symptoms of a problem that can arguably only be resolved by an etiological solution. Says Ms. Guimaraes: "We must therefore reassess our way of life."
Originally published on OpEdNews http://www.opednews.com/articles/When-Clean-Energy-Is-Not-E-by-Lucas-Bento-120827-911.html
And that is essentially what a federal court in Brazil avoided last week when it suspended the construction of potentially the world's third largest hydroelectric dam (the "Bel Monte dam") for failure to consult with indigenous communities in the Amazon region. The federal court's decision stated that the Brazilian Congress acted illegally in giving the green light for the project without consulting with indigenous tribes living in the area. As this renders the project's environmental license invalid, the consortium conducting the project is liable to a daily fine of 500,000 Brazilian reais (US$247,500) if construction continues.
Brazil has one of the world's most diversified energy matrices. According to Brazilian government data, 45.3% of its energy is generated from renewable sources, such as water, biomass, ethanol, wind and solar sources. Hydroelectric power plants, such as the would-be Bel Monte dam, generate over 75% of the electricity used in Brazil. As the Amazon region depends heavily on fossil fuels for energy, the Brazilian government is adamant on pressing ahead with the Bel Monte project to make the region more self-sufficient.
Brazil is also home to almost half a million indigenous people, whose ancestors pre-date Brazil's European discovery by the Portuguese in 1500. If construction of the dam goes ahead, approximately 500 square kilometers of land along the Xingu River in the Amazon would be flooded. According to official government estimates, this would displace some 16,000 people, with environmentalists putting the number much higher at 40,000. The project may also adversely affect large areas of the rainforest and fish stocks upon which indigenous people depend on.
In his ruling, the judge noted the consortium's failure to follow an international law known as the International Labor Organization Convention No. 169 ("the ILO Convention"), ratified by Brazil in 2002, which demands consultations of tribal and indigenous people, before work can commence in areas that may affect them. The Convention seeks to protect tribal peoples' right to, amongst other things, own the land they live on and to make decisions about projects that may ultimately have an adverse impact on their lives.
The court's decision comes as a surprise given that Brazil's Solicitor-General recently signed a directive that opens up all indigenous lands to mineral, dams, roads, military bases and other developments of "national interest' without the need to consult with or address concerns of indigenous people. Not only is the directive in clear violation of the ILO Convention, but it has also been described as "unconstitutional" by Brazil's Public Prosecutor's Office.
Ultimately, the court's decision may do little to prevent the construction of the Bel Monte dam. The consortium may appeal and win. Alternatively, the Brazilian Congress may expedite consultations with indigenous tribes to satisfy procedural requirements. The decision highlights inherent tensions in environmental policies that seek to promote clean energy to sustain economic growth on one hand, and sustainable development on the other. Decision-makers are caught in the middle by having to engage in a balancing act that may not always produce the best results, nor protect the most valuable interests.
"The fundamental question that Brazilians must re-examine is not merely how to balance different stakeholder interests, but how do we deal with our growing energy consumption" says Kamila Guimaraes De Moraes, a Brazilian environmental lawyer and Capes Foundation researcher at The Federal University of Santa Catarina in Brazil.
The development of clean forms of energy is a worthwhile pursuit as the world struggles to tame global warming. But it may not have the impact we so eagerly anticipate if it is not accompanied by a more fundamental -- cultural -- change. That is, recalibrating our hunger for energy writ-large. Any other solution is likely to merely treat the symptoms of a problem that can arguably only be resolved by an etiological solution. Says Ms. Guimaraes: "We must therefore reassess our way of life."
Originally published on OpEdNews http://www.opednews.com/articles/When-Clean-Energy-Is-Not-E-by-Lucas-Bento-120827-911.html
Sunday, 29 April 2012
The Banker Beggar's Loss
The Banker Beggar’s Loss
The beggar asked the banker,
Sir! Can you spare a dime or two,
The banker ignored the beggar,
So the beggar ignored him too.
The next day the beggar refined,
His fine begging-a-beggar-begot ,
And so he asked, once more, the banker:
Sir may you lend
me a dime or two.
Those days were bright and sunny,
And so the banker lent the beggar some change,
Zero interest, the banker said.
“No interest?”
“Yes, I am not interested in you.”
The days went by and the beggar,
With his refined verbal abilities,
Amassed such a big fortune,
That good fortune became his deed.
When the market crashed like a wave
Crashing on a helpless angry rock,
The beggar, now rich, looked at the banker,
And asked him if he’d like to sell his stock.
The banker sold for a loss, all his shares -
And all his stock,
In return for all the beggar’s fortune
(which he kept in his holeless socks).
The beggar then tried selling the stock,
To the people in the streets,
The same people he was begging from
In the early mornings of last week!
But in a tragic turn of events,
The market emerged from defeat,
And the beggar, poor beggar,
Now had worthless stock,
And no socks to warm his feet.
The beggar asked the banker,
Sir! Can you spare a dime or two,
The banker ignored the beggar,
So the beggar ignored him too.
Tuesday, 12 July 2011
A life of Capital Letters
In the beginning there was something,
Which expired in the end,
An illusion? A trick? A mirage?
A broken toy which you cannot mend.
A sentence starts with a Capital letter
A big, majestic imposter!
Full of character!
But ends timidly,
Lonely,
With a full stop;
Perhaps still (a) character?
But unworthy of a letter.
Live life like an open,
Open-ended sentence
No full stops.
Live big,
Majestically,
Live life like a Capital Letter.
Which expired in the end,
An illusion? A trick? A mirage?
A broken toy which you cannot mend.
A sentence starts with a Capital letter
A big, majestic imposter!
Full of character!
But ends timidly,
Lonely,
With a full stop;
Perhaps still (a) character?
But unworthy of a letter.
Live life like an open,
Open-ended sentence
No full stops.
Live big,
Majestically,
Live life like a Capital Letter.
Thursday, 23 June 2011
A Plastic Life
He focuses on the plastic.
Looking down at it, focused.
His voice disintegrates into textual ashes.
The world fades away, sober.
His fingertips extend virtual touches,
But fail to capture the soul’s thunder.
Yet he focuses on this plastic.
Like magic.
Looking down at it, hypnotized.
Looking sideways he dares not,
For his life lives in this gadget.
Connected to all,
Yet disconnected from life.
He lives on the plastic.
Reaching out for it, excited!
The mastery of the swipe!
Enslaves his soul to his skill,
Leading him to confound
Fantasy with what’s real.
He owns the thing, yes,
But fails to feel
The warm pleasure of joining a family’s evening meal.
His soul becomes plastic.
A hard processed thing; a lifeless fiction,
With no desires, no Life!
i.e. no dialectical contradictions,
With no fire, no spark!
Nothing
But for the plastic’s cancerous fruition.
Friday, 29 April 2011
On Revolutions, Tectonic Plates and Oil Prices
The price of oil has risen dramatically over the past few months. Oil prices have shot up 20% since December 2010 and are more than double what they were in 2005. What role, if any, has civil unrest in the Middle East and the Japanese tsunami’s aftermath played in this price increase?
Check out my new article at: http://balise.info/EN/balise-issue-2_4.php
Friday, 1 April 2011
Making sense of life
We are, therefore, divided by two great forces,
Our development shaped dualistically,
Our existence, binarily.
Divided by life and death,
Heaven and hell,
Right and wrong,
Positive and negative,
Light and darkness.
What lies in between lives in our memories.
Like a bridge that floats
Isolated from it's destination.
Where time and space intersect,
Where man and nature interact,
Where land and sea meet,
When semen and ovary combine,
The potency of the Divine is witnessed,
No void exists then.
The spirit of life continues to live in linear form.
We do not evolve, nor do we progress.
We merely peel off the next layer
Of what has already been crafted for us.
The magic of life is the experience;
Its tragedy: not being able to make sense of it.
Monday, 21 February 2011
Can Trade Law Prevent War?
Can trade promote cooperation and consequently prevent war?
Can trade law, in promoting trade, prevent war?
I've written a new article exploring these issues - feel free to read it at USLEXCODEX by clicking here.
Can trade law, in promoting trade, prevent war?
I've written a new article exploring these issues - feel free to read it at USLEXCODEX by clicking here.
Monday, 27 December 2010
Can Brazil bite without BITs?
"Brazil is not an emerging market. It has already emerged."
Brazil has been attracting an enviable amount of FDI in the past few years. Oh yes, we all know that the 'B' in the BRIC acronym stands for Brazil and that the country is set to become one of the biggest economies in the world by 2050. Yes, we also know that the country has found a colossal amount of oil off its coast which could place it amongst the biggest oil exporters in the planet. We are also aware that a number of companies once known as the emblem of Western life are now owned by Brazilians (Burger King, Budweiser, Keystone Foods, Pride etc).
We are not, however, conscious that Brazil has been somewhat of a rebel in the international investment arena. Indeed, the country has never ratified a bilateral investment treaty (BIT). It has signed some, but never ratified them. BITs offer numerous protections to foreign investors. Brazil, however, claims that its domestic legal system is enough to protect the investment of foreigners. The country does recognize arbitration as a dispute resolution method but - it is argued - lacks the formalism granted to investors by a BIT.
Despite the absence of BITs in the Brazilian legal fabric, FDI continues to pour in the country at the same rate that I pour champagne in my guest's flute glasses on New Year's Eve. FDI-wise, Brazil is "on a roll". Nothing seems to be able to hold it back. (I, on the other hand, should probably limit my alco-hospitality this year.)
Does the Brazilian experience suggest that in some cases BITs aren't necessary to attract FDI? Can investors nonetheless rely on international customary law to protect themselves in Brazil? Would Brazil's ratification of BITs further increase FDI?
I'm currently looking at these issues. Your thoughts on the matter would be greatly appreciated. Do not hesitate to drop me a line on lucasvelozo@hotmail with your views.
Happy New Year!
Brazil has been attracting an enviable amount of FDI in the past few years. Oh yes, we all know that the 'B' in the BRIC acronym stands for Brazil and that the country is set to become one of the biggest economies in the world by 2050. Yes, we also know that the country has found a colossal amount of oil off its coast which could place it amongst the biggest oil exporters in the planet. We are also aware that a number of companies once known as the emblem of Western life are now owned by Brazilians (Burger King, Budweiser, Keystone Foods, Pride etc).
We are not, however, conscious that Brazil has been somewhat of a rebel in the international investment arena. Indeed, the country has never ratified a bilateral investment treaty (BIT). It has signed some, but never ratified them. BITs offer numerous protections to foreign investors. Brazil, however, claims that its domestic legal system is enough to protect the investment of foreigners. The country does recognize arbitration as a dispute resolution method but - it is argued - lacks the formalism granted to investors by a BIT.Despite the absence of BITs in the Brazilian legal fabric, FDI continues to pour in the country at the same rate that I pour champagne in my guest's flute glasses on New Year's Eve. FDI-wise, Brazil is "on a roll". Nothing seems to be able to hold it back. (I, on the other hand, should probably limit my alco-hospitality this year.)
Does the Brazilian experience suggest that in some cases BITs aren't necessary to attract FDI? Can investors nonetheless rely on international customary law to protect themselves in Brazil? Would Brazil's ratification of BITs further increase FDI?
I'm currently looking at these issues. Your thoughts on the matter would be greatly appreciated. Do not hesitate to drop me a line on lucasvelozo@hotmail with your views.
Happy New Year!
Thursday, 2 December 2010
UK and US Takeovers
The hostile takeover is a powerful tool of corporate governance. In this context, takeover defences have evolved into increasingly complex and varied corporate weapons, with the goal of protecting target companies from the threat of hostile acquisitions. Nowadays, a large set of takeover defences exists. Despite their popularity, these defences remain controversial. Advocates of such defensive devices maintain that they increase the ability of target management to extract a higher price for target shares, as well as protect implicit labour contracts and pensions of target employees. Opponents of such devices argue that resistance reduces the probability of takeover and favours managerial entrenchment. And as a result target shareholders are worse off overall. Existing empirical work has been unable to resolve this issue since the effect of defensive devices on the value of target firms is inconclusive.
Despite clear similarities between their business and legal structures, the United Kingdom and the United States have not only pursued strikingly different models of corporate takeover regulation but also in the methods by which tactics are employed to counter takeovers i.e. via defensive mechanisms. As Armour and Skeel noted, “surprisingly little attention has been paid to the very significant differences in takeover regulation between the two countries.” This two-part post will set out the different takeover defences existent in both jurisdictions as well as try to review and compare them. Check it out by clicking here.
Sunday, 21 November 2010
Back to The Future: The Living Contract's Tale
A contract is a legal instrument that binds the promisors to their original promise. To some, it may appear that signing a contract is the act of setting in stone the agreement to the effect that it becomes inflexible and unchangeable. In other words, what is done is done.
But the Futures Contract is different. It wrestles with the weather, wars and world trade. It lives in the promisors' future; a future not yet materialized. The price may be set today - but the sale only occurs tomorrow. It evolves; it is elastic. The transferability of the futures contract reminds me of a nomad: it doesn't quite know where it'll end up but it will end up somewhere.
Eventually, however, this great journey through time comes to an abrupt end. We all know that at some point, the present - now past? - catches up with the future. And so does the futures contract, as it dies in the sea of trades in the futures exchange floor. Eventually, the commodity is sold and consumed. What is done is done.
In Towne v. Eisner 245 U.S. 418 at 425. (1918) Hobhouse J stated:
"A word is not a crystal, transparent and unchanged; it is the skin of living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used."
In similar fashion, the futures contract is not set in crystal like other contracts. It is the skin of living international commerce and although it may vary greatly in colour(?), content and value, it will invariably remain subordinate to its internal explosive device: Time.
But the Futures Contract is different. It wrestles with the weather, wars and world trade. It lives in the promisors' future; a future not yet materialized. The price may be set today - but the sale only occurs tomorrow. It evolves; it is elastic. The transferability of the futures contract reminds me of a nomad: it doesn't quite know where it'll end up but it will end up somewhere.
Eventually, however, this great journey through time comes to an abrupt end. We all know that at some point, the present - now past? - catches up with the future. And so does the futures contract, as it dies in the sea of trades in the futures exchange floor. Eventually, the commodity is sold and consumed. What is done is done.
In Towne v. Eisner 245 U.S. 418 at 425. (1918) Hobhouse J stated:
"A word is not a crystal, transparent and unchanged; it is the skin of living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used."
In similar fashion, the futures contract is not set in crystal like other contracts. It is the skin of living international commerce and although it may vary greatly in colour(?), content and value, it will invariably remain subordinate to its internal explosive device: Time.
Sunday, 14 November 2010
Negotiation Strategy and the Piracy Market
"To negotiate or not to negotiate, that is the question"
Ransom payments have reached a new peak. A few days ago, Somali pirates received a total of $12.3m in ransom money to release two ships (the Samho Dream and the Golden Blessing). We are dealing with highly sophisticated and organized criminals.
Pirates are getting better at what they do. The international effort which sought to combat piracy has failed.
What's going on?
Let's look at the mechanics and incentives behind piracy. A major incentive is clearly economic gains. When pirates hold property and/or crew hostage, it's difficult for shipowners/insurers/lawyers/law enforcement authorities to keep their heads cool. So how is the release of crew/property negotiated?
The fact is that little attention has been paid to this practical concern of the piracy problem. Can negotiation strategy help? What are the negotiation strategies employed with pirates? Are these the right ones? Perhaps part of the problem is how we negotiate with pirates.
States usually refuse to negotiate with terrorists for policy reasons. So why do we allow ourselves to negotiate with pirates?
We should recognize that ransom payments are counter-intuitively part of the problem.
The Piracy Market's logic is clear:
But what is the alternative?
I'm trying to explore these issues in more detail. The scarcity of information and the relatively secretive nature of ransom negotiations complicates research in this area but it is hoped that I'll be able to hypothecate on what information is available so as to help stakeholders better deal with pirates in these delicate situations.
It may be that we should re-consider not only whether current negotiation strategies are effective, but - perhaps more controversially - whether we should negotiate with pirates at all.
Any contributions from lawyers/negotiators/law enforcement agents are highly welcome.
Ransom payments have reached a new peak. A few days ago, Somali pirates received a total of $12.3m in ransom money to release two ships (the Samho Dream and the Golden Blessing). We are dealing with highly sophisticated and organized criminals.
Pirates are getting better at what they do. The international effort which sought to combat piracy has failed.
What's going on?
Let's look at the mechanics and incentives behind piracy. A major incentive is clearly economic gains. When pirates hold property and/or crew hostage, it's difficult for shipowners/insurers/lawyers/law enforcement authorities to keep their heads cool. So how is the release of crew/property negotiated?
The fact is that little attention has been paid to this practical concern of the piracy problem. Can negotiation strategy help? What are the negotiation strategies employed with pirates? Are these the right ones? Perhaps part of the problem is how we negotiate with pirates.
States usually refuse to negotiate with terrorists for policy reasons. So why do we allow ourselves to negotiate with pirates?
We should recognize that ransom payments are counter-intuitively part of the problem.
The Piracy Market's logic is clear:
- Ransom payments = incentive for pirates;
- Incentives create and formalize the market for piracy;
- The "Piracy Market" attracts new market participants;
- The new market participants perpetuate piracy.
But what is the alternative?
I'm trying to explore these issues in more detail. The scarcity of information and the relatively secretive nature of ransom negotiations complicates research in this area but it is hoped that I'll be able to hypothecate on what information is available so as to help stakeholders better deal with pirates in these delicate situations.
It may be that we should re-consider not only whether current negotiation strategies are effective, but - perhaps more controversially - whether we should negotiate with pirates at all.
Any contributions from lawyers/negotiators/law enforcement agents are highly welcome.
Thursday, 30 September 2010
NEW Paper on Maritime Piracy
Incorpolis' author has published a new paper on the dualistic nature of maritime piracy, arguing for greater uniformity and clarity in this area of law.
Download the paper by visiting the SSRN (Social Sciences Research Newtwork) website here.
[Full citation: Velozo de Melo Bento, Lucas, 'Along Liquid Paths': The Dualistic Nature of International Maritime Piracy Law (September 25, 2010). Available at SSRN: http://ssrn.com/abstract=1682624]
The paper will be published in the Berkeley Journal of International Law in 2011.
Download the paper by visiting the SSRN (Social Sciences Research Newtwork) website here.
[Full citation: Velozo de Melo Bento, Lucas, 'Along Liquid Paths': The Dualistic Nature of International Maritime Piracy Law (September 25, 2010). Available at SSRN: http://ssrn.com/abstract=1682624]
The paper will be published in the Berkeley Journal of International Law in 2011.
Thursday, 23 September 2010
Super Petrobras and the Largest IPO in Corporate History
The September issue of the Brazilian business magazine "EXAME" crowned Petrobras as the national "Superpoderosa" (the super powerful/ the Almighty). Rightly so, too. The company is already the biggest company in Brazil and one of the largest in Latin America. It is currently the 8th biggest oil company in the world. The company's shares feature in the top 20 most traded in the NYSE.And in the next few days, it could enter the record books with the largest IPO in the world's corporate history (circa $75bn). If all goes well, the company's market value could surpass $220bn, making it the 4th largest listed company in the world, ahead of giants Walmart and Microsoft.
As already one of the most profitable oil companies in the world, it wouldn't be surprising if Petrobras overtook Exxon and BP in the race to world domination of the "black gold". The company already plans to invest $224bn until 2014 - more than any other listed oil company in the world. The organisation's excellent CSR record is also to be praised - from its investment in education, culture and environmental protection, Petrobras is considered a world reference in CSR and community development. Sure, there are technological and managerial challenges related to Petrobras' growth. But with the "jeitinho Brasileiro" (the Brazilian "way"), it is possible that the "superpoderosa" could take the world by surprise and succeed to the Global Crown of what is one of the largest industries in the world.
Saturday, 26 June 2010
Of Life
Of life,
We all hang in separate branches,
Yet share the same old tree,
Differentiated products in equal-sized batches
Of the assembly line that led me to thee.
A fresh crisp grasp of reality,
Consummates the experience into a wonderful memory,
The omnipresence of a Mother’s love
Ignored by the desire of illusory celebrity.
The magic of the World turns life into prose,
A book we once hastily opened,
But must sometime reluctantly close.
The symphony of voices,
The mosaic of faces,
Is the museum of life
A collection of worthwhile chases?
A verse in Life is empty,
Without a hand to hold.
The paper on which life’s poetry is written,
Once invaluable, is now regrettably being sold.
Saturday, 19 June 2010
Developing Harmonious Policies
In furtherance of Cameron's "Big Society" (meaning yet to be precisely defined), I have developed (with the kind help of my brother) a preliminary blueprint for policy development in Britain.The axis illustrates the time/resources and time pressures inherent to any extraneous and inernal policy environments. In these circumstances, policy makers should strive to achieve harmony in policy development that encompasses a balance between the State, the private sector and civil society. More than a mere equilibirum must be achieved. The real goal must be "harmony" - not only amongst these three branches of society, but also in a way that is compatible with Nature. This would maximize chances to generate societal value that engages all sectors of the socio-economic paradigm without compromising the well-being of our environment.
Sunday, 13 June 2010
Welfare Benefits, Taxes and Entrepreneurship: An economic paradox?
Is the size of the state sector as measured by taxes and/or expenditures related to entrepreneurship?
I've been thinking about these issues for some time now and I've decided to address some of them in this post.
Introduction
Entrepreneurship is the new management paradigm (Timmons and Spinneli, 2009). It could also be described as an emerging economic one, too. Indeed, productive entrepreneurship is an essential factor of the economic performance of a country, and hence cross-country differences in the degree of productive entrepreneurial activity are likely candidates for explaining part of observed cross-country differences in economic performance (Davidsson and Hendrekson, 2001). As Minniti and Lévesque (2008) argue, entrepreneurship is increasingly seen as a vital force in economic development. However, there has been little room for the entrepreneurial element in theoretical mainstream economics (Baumol, 1993; Kirchhoff, 1994; Kirzner, 1997).
Entrepreneurs contribute to economic growth through generating, disseminating and applying innovative ideas; increasing competition and providing diversity among firms; enhancing economic efficiency and productivity (Audretsch and Thurik 2004). They are also an important engine for job creation, being responsible for anything from one-third to 70% of job creation in the economy (Kirchhoff 1994). Entrepreneurship has therefore a significant role to play in the economic drivers of a country. Consequently, it affects the entrepreneur’s relationship with the economy by way of taxation and expenditure as both a contributor to taxation but also a victim of it. Indeed, this post will argue that taxation and the welfare state’s expenditures has a negative impact on entrepreneurial activities in the economy. The logic is that the bigger the state/welfare sector, the more inhibited entrepreneurial culture will be in the economy.
The post is divided in two parts. Part 1 will consider the definition of entrepreneurship. This will lay the foundation for Part 2 which will consider (i) the effect of taxation on entrepreneurship and (ii) the effect of state expenditure on entrepreneurship.
Part 1: Entrepreneurship: Definitional Aspects
Entrepreneurship is a way of thinking, reasoning and acting that is opportunity obsessed, holistic in approach, and leadership balanced for the purpose of value creation and capture (Timmons and Spinneli, 2009). Arguably, entrepreneurship results in the creation, enhancement, realization, and renewal of value, not just for owners, but for all participants and stakeholders. Entrepreneurship can occur – and fail to occur – in firms that are old and new; small and large; fast and slow growing; in the private, not-for-profit, and public sectors; in all geographic points; and in all stages of a nation’s development, regardless of politics (Timmons and Spinneli, 2009, p.101).
Thus, in order for an activity to be defined as entrepreneurial it needs to be novel at least in some sense, but whether it is novel because it applies new knowledge or uses existing knowledge in new ways does not matter (Henreksson, 2005). However, as Glancey and McQuaid (2000) argue, entrepreneurship is invariably defined narrowly and it cannot be said to capture the wide-ranging and complex functions suggested outside mainstream economics.
Part 2: Relationship between Entrepreneurship and State Sector
The role of the state sector has long been perceived with suspicion by many privatisation advocates. Under the new economic paradigm, the entrepreneurship advocates may echo such sentiments as well. This part will consider the relationship between entrepreneurship and the state sector through two lenses: taxation and expenditures.
(i) Taxation Effect
Estrin et al (2009) argue that one of the three institutional dimensions which are likely to influence high-growth expectations entrepreneurship is the scale of the state as captured by the fiscal dimension. The primary issue with taxation is that it inhibits the accumulation of the necessary liquidity or capital to invest in a start-up entrepreneurial activity. For instance, a high tax rate on wage income makes it difficult to save a substantial portion of income that can subsequently be used for equity financing (Davidsson and Hendrekson, 2001) in the creation of a new venture.
Albeit focusing on the Swedish experience, Hendrekson (2001;2005) attempts to explain why the quantitative effect of a certain individual or firm specific factor may vary across institutional setups. One important prerequisite for the emergence of a great deal of entrepreneurship and the existence of a sizable number of high growth firms is that key industries and sectors of the economy are available for entrepreneurial exploitation (Davidsson and Hendrekson, 2001, p.17). For instance, several features of the pre-90’s Swedish tax system disfavoured smaller less capital-intensive firms and discouraged entrepreneurship and family ownership in favour of institutional forms of ownership. During an extended period of time there were extreme differences in taxation for different sources of finance and owner categories. Indeed, debt was the most favoured and new share issues the most disfavoured and households/individuals were taxed substantially more heavily than other owner categories (Davidsson and Hendrekson, 2001).
Thus, taxation regulations benefiting debt financing vis-a-vis to equity financing and institutional ownership relative to individual ownership systematically favoured large, real capital intensive, publicly traded and well-established firms (Davidsson and Hendrekson, 2001). Arguably this is detrimental to the entrepreneurial process as the availability of equity financing is critical for both start-ups and the expansion of existing firms (Holtz-Eakin, Joulfaian and Rosen, 1994).
In order to analyze how the tax system affects entrepreneurial behaviour it is not sufficient to focus on the taxation of individual owners of firms. To a large extent the return on entrepreneurial effort is taxed as wage income. Indeed, a large part of the income accruing from closely held companies has to be paid out as wage income. Furthermore, a great deal of the entrepreneurial function is carried out by employees without an ownership stake in the firm (Davidsson and Henrekson,, 2001). Consequently, a true entrepreneurial culture requires intrapreneurship. This is likely to demand a great deal of flexibility in the choice of remunerative schemes such as “high-powered incentives” (Stevenson, 1985) including stock-option scheme (Davidsson and Henrekson, 2001). However, in some jurisdictions, such as Sweden, the of use of stock options to encourage entrepreneurial behaviour among employees is highly penalized by the tax system, since gains on options are taxed as wage income when the stock options are tied to employment in the firm (Davidsson and Henrekson, 2001). There, the taxation of entrepreneurial income (including stock options) continues to be high, the steep rate of labour taxation reduces the rate of return on human capital investment and the scope for entrepreneurial expansion of household-related services, and the labour market remains highly regulated (Ibid). High taxation on Venture Capitalist firms also constrains the entrepreneurial process. From such a tax incidence it follows that the government’s relationship (fiscal-wise) with entrepreneurship is in a sense negative. However this does not imply that the government should give support to individual entrepreneurs, “since they do not have the competence to pick winners” (Saxenian, 1996).
If taxation of entrepreneurial income is made no more severe than taxation of interest income and business income of portfolio investors, this will strengthen the incentive for entrepreneurship or expansion of operations when this is socially profitable. Likewise, a high rate of labour taxation is, in many instances, likely to be an impediment to entrepreneurial activity, especially in the household-related service sector (Davidsson and Henrekson, 2001). Research by Henreksson (2005) demonstrates the extraordinary extent to which the Swedish tax system favoured, and still favours, institutional ownership and discouraged direct household ownership of firms, which is a prerequisite for entrepreneurial firms, at least in the early phase of their life cycle.
(ii) Welfare state effect (expenditures)
Lindbeck (1988) defines the term ”welfare state” as the entity responsible for the array of publicly financed provision or subsidization of personal services, notably for health, education, child care and care of the elderly, and for social-security systems, transfers and subsidies. The architects behind the build-up of the welfare state scarcely considered that it would have detrimental effects on the entrepreneurial function (Henreksson, 2005). The expansion of the welfare state was a salient feature of almost all industrialized countries, in particular during the 1960s and 1970s (Castles 1998).
In general, studies of the impact on economic performance of a large welfare state find that the overall effect of public programs is to give rise to harmful economic disincentive effects (Agell 1996). Indeed, productivity is partially the product of the accumulation of investments by private firms (or not-for-profits) in the economy. However, public expenditures and taxation that deter such investments by creating marginal tax and benefit wedges, or that reduce incentives to save and accumulate capital in other ways, reduce growth (Henrekson, 2005). But what exactly are these expenditure provisions?
For instance, welfare state provisions such as unemployment benefit remove a number of savings motives for the individual. As long as unemployment insurance, income-dependent pensions and sick-leave benefits, higher education and highly subsidized health and care services are provided by the government, most of the essential savings motives for the average person disappear. There are numerous research results suggesting that such disincentives to savings and individual wealth accumulation are likely to lower the propensity to entrepreneurship (Henrkesson, 2005). Low private savings also exacerbate the inherent problem caused by asymmetric information, since wealth-constrained would-be entrepreneurs are unable to signal forcibly to outside investors by means of making sizeable equity infusions of their own (Henreksson, 2005) or even obtain debt finance from say a bank.
Due to the de facto monopolization by the public sector of the production of many income-elastic services vast areas of the economy have remained unexploited as sources of commercial growth. In particular in the health sector, it is easy to imagine how a different organizational mode could have provided a basis for the emergence of new high-growth firms (Henreksson, 2005).
Indeed, a large percentage of all work, most notably household work, is performed outside the market. Cross-country comparisons of industry-level employment also point to considerable scope for substitution of certain economic activities between the market and nonmarket sectors (Davis and Henrekson 2005). For Sweden, studies indicate that more time is spent on production in the household than in the market. According to the 1997 Service Sector Taxation Report (SOU 1997:17), 7 billion hours were devoted to household work in 1993, while production of goods and public and private services accounted for only 5.9 billion hours. Henrekson (2005) demonstrate that relative employment in the US is considerably greater in household-related services when compared to Sweden, such as repair of durable goods, hotel and restaurant, retail sales, laundry and household work. The Swedish experience may again illustrate how taxation has a detrimental effect on entrepreneurship. Indeed, one could ask why Sweden does not show a similar trend in creating start-ups/entrepreneurial businesses in the household sector. A fundamental reason emanates from high rates of personal taxation. Personal taxes raise the full price of goods and services. For many goods (e.g., high-tech products like computers), a high price may cause the consumer to forego a purchase, or to buy a lower quality version of the good. Consequently, high rates of taxation of labour tend to make it more profitable to shift a large share of the service production to the informal economy, in particular into the “do-it-yourself” sector. As a result, the emergence of a large, efficient service sector competing successfully with unpaid work is less likely in a large welfare state than in countries with lower rates of labour taxation (Henreksson, 2005). This means that tangible opportunities for entrepreneurial business development become less accessible. In other words, higher rates of personal taxation discourage the market provision of goods and services that substitute closely for home-produced services, which reduces the incidence of entrepreneurial activity in the household area.
The literature (Storey 1994) draws a distinction between two types of entrepreneurship: “necessity based” and “opportunity based”. The former is when the entrepreneur is pushed into the venture because he has no other alternative i.e. to survive. The latter form is when the individual is pulled into the opportunity. In the labour market, the “social safety nets” affect what is considered a reasonable wage, the unions’ wage claims, and the kinds of businesses that entrepreneurs are willing to invest in and commence (Henreksson, 2005). To the extent that social safety nets in welfare states push up reservation wages, they affect both types of entrepreneurship. They discourage necessity-based entrepreneurship by providing an alternative source of income at a reasonable level and they curb opportunity-based entrepreneurship by pushing up reservation wages so that many activities that are (initially) low-productivity activities are largely barred from entrepreneurial exploitation, since entrepreneurs have low incentives to start businesses that presuppose wages below the level guaranteed by the ultimate safety net.
(iii) Further remarks
The aforementioned analysis suggests that a larger state sector will militate against entrepreneurial activity. Taxes and welfare provisions may affect entrepreneurial entry via their direct impact on expected returns to entrepreneurial activity and its opportunity cost (Estrin et al, 2009). High and increasing marginal level of taxes may weaken incentives for entrepreneurship by reducing potential gains. Moreover, a burdensome tax system (Aidis and Mickiewicz 2006), and one that works against capital income and benefits debt financing when compared to to equity financing (Davidsson and Henrekson 2002), has been identified as restraining firm growth (Estrin, 2009).
Furthermore, in synthesis, it is argued that high levels of welfare support provide alternative sources of income and may therefore reduce the net expected return to entrepreneurship. As a preliminary conclusion this therefore implies that entrepreneurial activity may be inversely related to the size of the state sector (Estrin, 2009, p.7). However, one must consider that expenditure in education and infrastructure are essential to enable entrepreneurs to carry on their businesses. Therefore, it is arguable that the size of the state sector is selectively inversely related to entrepreneurship activity.
Conclusion
This post has considered whether the state sector as measured by taxation and expenditure is related to entrepreneurship. The immediate response to that inquiry is to be answered in the positive. Both high taxation and expenditure are signs of a large state sector such as welfare states found in the economies of Sweden and, to a certain extent, England. Both high taxation and high expenditure by the state (i.e. unemployment benefits) translates into inhibited entrepreneurial behaviour by individuals and thus undermines entrepreneurship in the economy.
It is important both to extend the economic arenas in which competent entrepreneurs can thrive, and to improve the institutions and rules of the game determining the incentive structure for entrepreneurs (Hendrekson, 2001). A continued almost exclusive reliance on taxation for the financing of key services like education, health care (such as the NHS), child care and care of the elderly can, for the reasons explored in this post be expected to become increasingly problematic (Henreksson, 2005) not only for the state’s ability to control its finances but also in its ability to craft an economy that breeds and nourishes entrepreneurships. There seems to be some room for a welfare state to reform itself in ways that promote entrepreneurship, while the core of the welfare model remains intact. However, a vibrant entrepreneurial culture and the set of institutions that underpins such a culture are very remotely related to the welfare state culture and its institutions, perhaps they are even negatively related (Henreksson, 2005).
I've been thinking about these issues for some time now and I've decided to address some of them in this post.
Introduction
Entrepreneurship is the new management paradigm (Timmons and Spinneli, 2009). It could also be described as an emerging economic one, too. Indeed, productive entrepreneurship is an essential factor of the economic performance of a country, and hence cross-country differences in the degree of productive entrepreneurial activity are likely candidates for explaining part of observed cross-country differences in economic performance (Davidsson and Hendrekson, 2001). As Minniti and Lévesque (2008) argue, entrepreneurship is increasingly seen as a vital force in economic development. However, there has been little room for the entrepreneurial element in theoretical mainstream economics (Baumol, 1993; Kirchhoff, 1994; Kirzner, 1997).
Entrepreneurs contribute to economic growth through generating, disseminating and applying innovative ideas; increasing competition and providing diversity among firms; enhancing economic efficiency and productivity (Audretsch and Thurik 2004). They are also an important engine for job creation, being responsible for anything from one-third to 70% of job creation in the economy (Kirchhoff 1994). Entrepreneurship has therefore a significant role to play in the economic drivers of a country. Consequently, it affects the entrepreneur’s relationship with the economy by way of taxation and expenditure as both a contributor to taxation but also a victim of it. Indeed, this post will argue that taxation and the welfare state’s expenditures has a negative impact on entrepreneurial activities in the economy. The logic is that the bigger the state/welfare sector, the more inhibited entrepreneurial culture will be in the economy.
The post is divided in two parts. Part 1 will consider the definition of entrepreneurship. This will lay the foundation for Part 2 which will consider (i) the effect of taxation on entrepreneurship and (ii) the effect of state expenditure on entrepreneurship.
Part 1: Entrepreneurship: Definitional Aspects
Entrepreneurship is a way of thinking, reasoning and acting that is opportunity obsessed, holistic in approach, and leadership balanced for the purpose of value creation and capture (Timmons and Spinneli, 2009). Arguably, entrepreneurship results in the creation, enhancement, realization, and renewal of value, not just for owners, but for all participants and stakeholders. Entrepreneurship can occur – and fail to occur – in firms that are old and new; small and large; fast and slow growing; in the private, not-for-profit, and public sectors; in all geographic points; and in all stages of a nation’s development, regardless of politics (Timmons and Spinneli, 2009, p.101).
Thus, in order for an activity to be defined as entrepreneurial it needs to be novel at least in some sense, but whether it is novel because it applies new knowledge or uses existing knowledge in new ways does not matter (Henreksson, 2005). However, as Glancey and McQuaid (2000) argue, entrepreneurship is invariably defined narrowly and it cannot be said to capture the wide-ranging and complex functions suggested outside mainstream economics.
Part 2: Relationship between Entrepreneurship and State Sector
The role of the state sector has long been perceived with suspicion by many privatisation advocates. Under the new economic paradigm, the entrepreneurship advocates may echo such sentiments as well. This part will consider the relationship between entrepreneurship and the state sector through two lenses: taxation and expenditures.
(i) Taxation Effect
Estrin et al (2009) argue that one of the three institutional dimensions which are likely to influence high-growth expectations entrepreneurship is the scale of the state as captured by the fiscal dimension. The primary issue with taxation is that it inhibits the accumulation of the necessary liquidity or capital to invest in a start-up entrepreneurial activity. For instance, a high tax rate on wage income makes it difficult to save a substantial portion of income that can subsequently be used for equity financing (Davidsson and Hendrekson, 2001) in the creation of a new venture.
Albeit focusing on the Swedish experience, Hendrekson (2001;2005) attempts to explain why the quantitative effect of a certain individual or firm specific factor may vary across institutional setups. One important prerequisite for the emergence of a great deal of entrepreneurship and the existence of a sizable number of high growth firms is that key industries and sectors of the economy are available for entrepreneurial exploitation (Davidsson and Hendrekson, 2001, p.17). For instance, several features of the pre-90’s Swedish tax system disfavoured smaller less capital-intensive firms and discouraged entrepreneurship and family ownership in favour of institutional forms of ownership. During an extended period of time there were extreme differences in taxation for different sources of finance and owner categories. Indeed, debt was the most favoured and new share issues the most disfavoured and households/individuals were taxed substantially more heavily than other owner categories (Davidsson and Hendrekson, 2001).
Thus, taxation regulations benefiting debt financing vis-a-vis to equity financing and institutional ownership relative to individual ownership systematically favoured large, real capital intensive, publicly traded and well-established firms (Davidsson and Hendrekson, 2001). Arguably this is detrimental to the entrepreneurial process as the availability of equity financing is critical for both start-ups and the expansion of existing firms (Holtz-Eakin, Joulfaian and Rosen, 1994).
In order to analyze how the tax system affects entrepreneurial behaviour it is not sufficient to focus on the taxation of individual owners of firms. To a large extent the return on entrepreneurial effort is taxed as wage income. Indeed, a large part of the income accruing from closely held companies has to be paid out as wage income. Furthermore, a great deal of the entrepreneurial function is carried out by employees without an ownership stake in the firm (Davidsson and Henrekson,, 2001). Consequently, a true entrepreneurial culture requires intrapreneurship. This is likely to demand a great deal of flexibility in the choice of remunerative schemes such as “high-powered incentives” (Stevenson, 1985) including stock-option scheme (Davidsson and Henrekson, 2001). However, in some jurisdictions, such as Sweden, the of use of stock options to encourage entrepreneurial behaviour among employees is highly penalized by the tax system, since gains on options are taxed as wage income when the stock options are tied to employment in the firm (Davidsson and Henrekson, 2001). There, the taxation of entrepreneurial income (including stock options) continues to be high, the steep rate of labour taxation reduces the rate of return on human capital investment and the scope for entrepreneurial expansion of household-related services, and the labour market remains highly regulated (Ibid). High taxation on Venture Capitalist firms also constrains the entrepreneurial process. From such a tax incidence it follows that the government’s relationship (fiscal-wise) with entrepreneurship is in a sense negative. However this does not imply that the government should give support to individual entrepreneurs, “since they do not have the competence to pick winners” (Saxenian, 1996).
If taxation of entrepreneurial income is made no more severe than taxation of interest income and business income of portfolio investors, this will strengthen the incentive for entrepreneurship or expansion of operations when this is socially profitable. Likewise, a high rate of labour taxation is, in many instances, likely to be an impediment to entrepreneurial activity, especially in the household-related service sector (Davidsson and Henrekson, 2001). Research by Henreksson (2005) demonstrates the extraordinary extent to which the Swedish tax system favoured, and still favours, institutional ownership and discouraged direct household ownership of firms, which is a prerequisite for entrepreneurial firms, at least in the early phase of their life cycle.
(ii) Welfare state effect (expenditures)
Lindbeck (1988) defines the term ”welfare state” as the entity responsible for the array of publicly financed provision or subsidization of personal services, notably for health, education, child care and care of the elderly, and for social-security systems, transfers and subsidies. The architects behind the build-up of the welfare state scarcely considered that it would have detrimental effects on the entrepreneurial function (Henreksson, 2005). The expansion of the welfare state was a salient feature of almost all industrialized countries, in particular during the 1960s and 1970s (Castles 1998).
In general, studies of the impact on economic performance of a large welfare state find that the overall effect of public programs is to give rise to harmful economic disincentive effects (Agell 1996). Indeed, productivity is partially the product of the accumulation of investments by private firms (or not-for-profits) in the economy. However, public expenditures and taxation that deter such investments by creating marginal tax and benefit wedges, or that reduce incentives to save and accumulate capital in other ways, reduce growth (Henrekson, 2005). But what exactly are these expenditure provisions?
For instance, welfare state provisions such as unemployment benefit remove a number of savings motives for the individual. As long as unemployment insurance, income-dependent pensions and sick-leave benefits, higher education and highly subsidized health and care services are provided by the government, most of the essential savings motives for the average person disappear. There are numerous research results suggesting that such disincentives to savings and individual wealth accumulation are likely to lower the propensity to entrepreneurship (Henrkesson, 2005). Low private savings also exacerbate the inherent problem caused by asymmetric information, since wealth-constrained would-be entrepreneurs are unable to signal forcibly to outside investors by means of making sizeable equity infusions of their own (Henreksson, 2005) or even obtain debt finance from say a bank.
Due to the de facto monopolization by the public sector of the production of many income-elastic services vast areas of the economy have remained unexploited as sources of commercial growth. In particular in the health sector, it is easy to imagine how a different organizational mode could have provided a basis for the emergence of new high-growth firms (Henreksson, 2005).
Indeed, a large percentage of all work, most notably household work, is performed outside the market. Cross-country comparisons of industry-level employment also point to considerable scope for substitution of certain economic activities between the market and nonmarket sectors (Davis and Henrekson 2005). For Sweden, studies indicate that more time is spent on production in the household than in the market. According to the 1997 Service Sector Taxation Report (SOU 1997:17), 7 billion hours were devoted to household work in 1993, while production of goods and public and private services accounted for only 5.9 billion hours. Henrekson (2005) demonstrate that relative employment in the US is considerably greater in household-related services when compared to Sweden, such as repair of durable goods, hotel and restaurant, retail sales, laundry and household work. The Swedish experience may again illustrate how taxation has a detrimental effect on entrepreneurship. Indeed, one could ask why Sweden does not show a similar trend in creating start-ups/entrepreneurial businesses in the household sector. A fundamental reason emanates from high rates of personal taxation. Personal taxes raise the full price of goods and services. For many goods (e.g., high-tech products like computers), a high price may cause the consumer to forego a purchase, or to buy a lower quality version of the good. Consequently, high rates of taxation of labour tend to make it more profitable to shift a large share of the service production to the informal economy, in particular into the “do-it-yourself” sector. As a result, the emergence of a large, efficient service sector competing successfully with unpaid work is less likely in a large welfare state than in countries with lower rates of labour taxation (Henreksson, 2005). This means that tangible opportunities for entrepreneurial business development become less accessible. In other words, higher rates of personal taxation discourage the market provision of goods and services that substitute closely for home-produced services, which reduces the incidence of entrepreneurial activity in the household area.
The literature (Storey 1994) draws a distinction between two types of entrepreneurship: “necessity based” and “opportunity based”. The former is when the entrepreneur is pushed into the venture because he has no other alternative i.e. to survive. The latter form is when the individual is pulled into the opportunity. In the labour market, the “social safety nets” affect what is considered a reasonable wage, the unions’ wage claims, and the kinds of businesses that entrepreneurs are willing to invest in and commence (Henreksson, 2005). To the extent that social safety nets in welfare states push up reservation wages, they affect both types of entrepreneurship. They discourage necessity-based entrepreneurship by providing an alternative source of income at a reasonable level and they curb opportunity-based entrepreneurship by pushing up reservation wages so that many activities that are (initially) low-productivity activities are largely barred from entrepreneurial exploitation, since entrepreneurs have low incentives to start businesses that presuppose wages below the level guaranteed by the ultimate safety net.
(iii) Further remarks
The aforementioned analysis suggests that a larger state sector will militate against entrepreneurial activity. Taxes and welfare provisions may affect entrepreneurial entry via their direct impact on expected returns to entrepreneurial activity and its opportunity cost (Estrin et al, 2009). High and increasing marginal level of taxes may weaken incentives for entrepreneurship by reducing potential gains. Moreover, a burdensome tax system (Aidis and Mickiewicz 2006), and one that works against capital income and benefits debt financing when compared to to equity financing (Davidsson and Henrekson 2002), has been identified as restraining firm growth (Estrin, 2009).
Furthermore, in synthesis, it is argued that high levels of welfare support provide alternative sources of income and may therefore reduce the net expected return to entrepreneurship. As a preliminary conclusion this therefore implies that entrepreneurial activity may be inversely related to the size of the state sector (Estrin, 2009, p.7). However, one must consider that expenditure in education and infrastructure are essential to enable entrepreneurs to carry on their businesses. Therefore, it is arguable that the size of the state sector is selectively inversely related to entrepreneurship activity.
Conclusion
This post has considered whether the state sector as measured by taxation and expenditure is related to entrepreneurship. The immediate response to that inquiry is to be answered in the positive. Both high taxation and expenditure are signs of a large state sector such as welfare states found in the economies of Sweden and, to a certain extent, England. Both high taxation and high expenditure by the state (i.e. unemployment benefits) translates into inhibited entrepreneurial behaviour by individuals and thus undermines entrepreneurship in the economy.
It is important both to extend the economic arenas in which competent entrepreneurs can thrive, and to improve the institutions and rules of the game determining the incentive structure for entrepreneurs (Hendrekson, 2001). A continued almost exclusive reliance on taxation for the financing of key services like education, health care (such as the NHS), child care and care of the elderly can, for the reasons explored in this post be expected to become increasingly problematic (Henreksson, 2005) not only for the state’s ability to control its finances but also in its ability to craft an economy that breeds and nourishes entrepreneurships. There seems to be some room for a welfare state to reform itself in ways that promote entrepreneurship, while the core of the welfare model remains intact. However, a vibrant entrepreneurial culture and the set of institutions that underpins such a culture are very remotely related to the welfare state culture and its institutions, perhaps they are even negatively related (Henreksson, 2005).
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